The Poor Without the Welfare State

The first step in the emancipation of the victim class is to raise the victims out of dependency to a secure competence. Emancipated from the liberal plantation they may then take their place in the economic life of the nation.

Suppose the administrative welfare state were to collapse tomorrow, what would happen to the poor and the traditionally marginalized that presently depend on welfare state programs for the basic necessities of life? How would they get basic schooling for their children? How would they obtain health care? How would they survive a sudden loss of income from illness or accident? Of course, we cannot know how the present dependent classes in the developed countries would fare. But we do know, from studies of life in the Third World, how poor people in the cities live and cope with the vicissitudes of life without the benefit of a comprehensive administrative welfare state.

But first, let us rehearse the reason we have a welfare state. There is no better witness than Helen M. Todd, a factory inspector in Chicago before World War I, and her testimony on “Why Children Work.”1 They worked, before World War I, because their fathers were dead or sick. That is why we have a welfare state. To us, it is wrong that a child should be forced to to go to work rather than go to school. It is therefore disturbing to learn, from the children that Todd interviewed, that they did not regard themselves as marginalized or deprived. They mostly preferred work to going to school. They hated school because the teachers treated them like morons, hit them and slapped them and kept them in at recess. Instead of a regular paycheck that their families appreciated, they got from school lousy report cards that got them in trouble.

Perhaps things are not quite as simple as the welfare state supporter supposes.

We will begin with education. Everybody knows that we need government for education. But not in the Third World. In third-world slums an extensive private education system flourishes today educating fee-paying students, with no government subsidy or assistance. Its customers are the poor.

It was in 2000 that James Tooley encountered the thriving private education system for the poor in Hyderabad, India. An education expert working on a project for the World Bank to evaluate private schools for rich kids in the Third World, he was traveling by autorickshaw through Hyderabad’s Old City slums and kept noticing advertisements for “English Medium” private schools. He had just seen the visible part of an iceberg of informal schools for the poor that flourish, unknown to government education bureaucracies, in slums across the world. These schools were informal businesses that provided schooling for the children of the poor where government schools were sub-standard. They charged fees of $2 to $3 per week and provided financial aid for the poorest of the poor, typically the children of widowed or abandoned women. A typical school was run as a for-profit sole proprietorship, hired teachers, and served about 200 children. In 2003 Tooley obtained a grant to do a worldwide survey of these schools and found that they typically outperformed government schools and approached the results of formal private schools for the children of the middle class and the rich. He published the results in his book The Beautiful Tree.

In the Third World the poor cannot rely on the safety net of the welfare state, so they must get jobs when they migrate to the city. But the city has not usually welcomed the rural poor to its economy. That is what medieval guilds were all about. So the rural poor in the city often have to work outside the law — in the informal economy — to survive and thrive. Hernando De Soto’s The Other Path: The Invisible Revolution in the Third World is a story of the astonishing success of the urban poor of Lima, Peru, in forcing their way into the urban economy. The book was the product of detailed research into the informal economy in Lima conducted originally in the late 1980s. It focused on three areas where informality — extralegal activity — had become a significant factor in the Peruvian economy: housing, street vending, and mass transit. In each of these areas, the poor immigrants arriving in Lima from the Andean altiplano had developed a stylized act of violence, an “invasion,” to create a social space in which they could claim and win private property rights from the state. Resort to violence was necessary, according to De Soto’s research, because the new immigrants from the countryside could not obtain the necessaries of life from the formal economy. Peru’s economy was mercantilist, in the sense that the political system had politicized everything.

[The] politicization of Peruvian society means that all problems are handled primarily according to the procedures established by the government, rather than according to other standards such as economic efficiency, morality, or justice. Everything is left in the state’s hands, and society inevitably becomes bureaucratized and centralized. Politicization, centralization, and bureaucratization can all be traced to the same source: redistributive laws.2

In the political system, of course, the “emphasis is on reconciling different special interests, favoring those which are considered appropriate and redirecting resources to them through legal channels.”3 An “appropriate” special interest inevitably means a powerful and established “redistributive combine.”

When the peasants from the altiplano, the fertile farmland in the Andes, started appearing in strength in Lima in the mid 20th century, the political system didn’t know what to do with them, for after all, they represented a new interest that, if acknowledged, would demand a share in the distribution of political spoils. There was no place for them in the established redistributive state, not for employment, not for transportation, not for housing. The peasants solved their problem in a profoundly impressive way. They developed the tactic of “invasion,” a stylized act of collective violence, to create a beachhead into the city’s economy that the political system would be reluctant to challenge.

In housing, this invasion would involve a group of people invading a piece of unused state land and immediately occupying it and setting up temporary shelters of woven matting according to a prearranged street plan. The members of the informal settlement would already have organized before the invasion a democratic government competent to govern the settlement and perform the functions of the criminal and civil law. In street vending, the tactic was similar. Itinerant peddlers would “invade” an area of sidewalk to set up stalls and sell prepared food, groceries, and common consumer durables. Eventually, the street vendors would combine to build permanent markets and move off the street. In bus transportation, drivers would “invade” bus routes and start to deliver bus service to the city. About 90 percent of Lima’s bus service was informal.

Off the Books: The Underground Economy of the Urban Poor by Sudhir Alladi Venkatesh is another study of the informal economy in the city. It describes the result of sociological research conducted by Venkatesh into work and life on the South Side of Chicago: the area just to the south of wealthy Hyde Park where the young Barack Obama flourished as an activist and a politician. Unskilled workers, Venkatesh found unsurprisingly, supplemented their government benefits with income from work that paid less than minimum wage and didn’t get reported to the state welfare bureaucracies. This was not just a question of working casually for cash. On the contrary, informal work often means setting up a small business, defending informal ownership rights in a “pitch,” developing relationships with wholesalers, establishing credit and acquiring stock, and finding a place to store business equipment and stock. Venkatesh found that informal workers did not operate in a social vacuum. They had to negotiate with a variety of interests to be able to trade without harassment. They had to square with police, with formal store managers, with the people living close to their business “pitch” and had to find a way to store their business equipment safely when they were not working.

In Portfolios of the Poor: How the World’s Poor Live on $2 a Day Daryl Collins and co-authors related how the poor in third-world cities, with irregular income, manage to save money: they had to, for with an irregular income from entrepreneurial activities like street trading, they needed to provide against a rainy day. Of course, these people used elite-sponsored micro-finance when they could, and resorted to regular money-lenders when they had to. But most of their savings was done by depositing monies on an interest-free basis with friends. Why? Because it was safer than keeping all their savings at home, and more convenient than a commercial bank. Also, it set up a network of trust in the neighborhood.

In The Better Angels of our Nature Steven Pinker reminded us that, while the middle class enjoys the full benefits of the peace enforced by modern government, the poor do not. For a number of reasons their homes and their persons are not as safe as those of the middle class. The poor are not well served by the police, who vacillate between ignoring the poor and coming down hard on them. But the poor observe a “no snitching” rule, partly due to the mistrust of authority and partly from a genuine fear of the local urban street gang. There is, of course, the need to maintain a distance from law enforcement when you are engaged in “off-the-books” activity. The consequence has been, ever since the poor started migrating to the city at the start of the industrial revolution, that a proto-state has developed in the immigrant ghetto. The poor are governed at a distance by the legal government, its police, and its bureaucracies, and up close by the criminal gang. When compared with the soporific routines of middle-class life, the anomalous situation of the poor demands that the modern poor must develop street smarts and adaptation skills utterly superfluous to the ordinary middle-class worker and homeowner.

The reports detailed above give the lie to the notion that the poor represent an underclass lacking in the basic skills needed to survive in the modern world unless materially assisted by a paternalistic elite or unless organized by militant cadres of “educated youth.” It turns out that the poor are perfectly able to form their own networks of trust, just like businessmen operating in the formal sector. So why don’t they?

They don’t because the poor in the welfare state need to operate in the shadows. On the one hand, with their limited skills they can’t afford the costs and regulations that the government imposes on the formal economic sector, and sensibly judge that they cannot afford to operate in the formal sector. On the other hand, since the poor usually receive government benefits they face penal marginal tax rates whenever they attempt to obtain income from the formal sector. The practical thing to do is to work informally and hide their “off-the-books” income from the government so they can continue to receive their accustomed government benefits. That way they keep their benefits and avoid the 50 to 100 percent marginal tax rates that would result from a combination of formal employment and reduction in government benefits. The urban poor improvise their lives without the law, with ingenuity, and often with the kind of entrepreneurial skills and determination that are celebrated in the formal business sector.

What does the informal economy look like in liberal Seattle, Washington? Here is the story of “Hank,” a small-time contractor who, back in 2010, built fences. Hank employed Mexicans, presumably illegal, and he didn’t have a bank account, and wasn’t a licensed contractor. So we can assume that “Hank” paid his employees in cash, and probably ran most of his business off the books. Why would he do that? The answer is obvious. If he were to employ formal construction labor in Washington State in 2010 he would have to pay FICA tax of 7.65 percent; he would have to pay unemployment tax of about six percent, and he would have to pay disability premiums to the State Department of Labor and Industries of $1.20 per hour. If we assume that “Hank” pays his laborers $10 per hour, the disability cost alone is 12 percent of payroll. Total on-the-books cost of taxes and premiums for his informal employees would be about 25 percent.

You can see why the tolerance extended to illegal immigrant labor in liberal “sanctuary” cities like Seattle is so beneficial to marginal employers like “Hank.” First of all, “Hank” has limited organizational skills. Thus a cash business is highly attractive to him. His illegal immigrant laborers actually prefer getting cash wages since they need to keep a distance from the formal economy. And he doesn’t have to file any of the complicated forms and reports that he is barely able to understand. Even though “Hank’s” business is shot through with illegality, it is still built on trust. He and his employees need each other; they all benefit from his resort to off-the-books informality.

But let us think beyond the immediate needs of a marginal contractor like “Hank” and think deeper thoughts. The point of the 7.65 percent FICA tax is to provide for retirement income. According to the national myth, this money is socked away by the government in a Trust Fund and paid back as retirement income. In fact, the politicians do not sock the money away; the Social Security Trust Fund is an accounting mirage. The monies collected in today’s FICA taxes are used to pay today’s payments to retirees. Any money left over can be spent on existing programs: that is to buy votes at the next election.

But there is a bigger problem. Even supposing that the fiction maintained by the government is true, that the monies paid in FICA taxes are sitting in a trust fund waiting for the taxpayer to retire we should ask: should a twenty-something’s savings be sterilized by the government like this? And consider the unemployment tax that, for landscape workers, is 6 percent in Washington State. Might not an enterprising construction worker prefer to tuck that money into his own savings account against a rainy day? And as for disability, is this really the best we can do for our construction laborers? Charge their employers $1.20 per hour? All these monies, that add up to $2.50 an hour for a $10-an-hour laborer, could be put to other uses. The laborer could use the money to save up for a home. He could save the money to start up a business, or for any other good reason. Savings, capital, nest egg: money is fungible, and can be put to any good use. Why is the savings of the modern laborer sterilized by the state into bureaucratic government programs? It can’t be because the average low-paid laborer is unable to organize his life: the off-the-books literature sampled above shows that the poor are in fact highly inventive and capable. Yet they are said to be the most vulnerable. Are they?

Perhaps it is time for the ruling class to ask just how vulnerable and how marginal the poor and the low-paid really are. Because if the poor are not vulnerable and incapable, then why is the power and the force of the state required to support them with welfare programs, to sequester their wages and manage their lives for them — beyond the obvious reason that most everyone, from the illegal laborer to the billionaire crony capitalist, will vote for a politician that promises him free stuff or free money?

But I saw a man yesterday who knows a fellow who had it from a chappie
that said that Urquhart had been dipping himself a bit recklessly off the deep end.
Freddy Arbuthnot
Dorothy L. Sayers, Strong Poison

Civil Societya complex welter of intermediate institutions, including businesses, voluntary associations, educational institutions, clubs, unions, media, charities, and churchesbuilds, in turn, on the family, the primary instrument by which people are socialized into their culture and given the skills that allow them to live in broader society and through which the values and knowledge of that society are transmitted across the generations.Francis Fukuyama, Trust

We have met with families in which for weeks together, not an article of sustenance but potatoes had been used; yet for every child the hard-earned sum was provided to send them to school.
E. G. West, Education and the State

When we began first to preach these things, the people appeared as awakened from the sleep of agesthey seemed to see for the first time that they were responsible beings, and that a refusal to use the means appointed was a damning sin.
Finke, Stark, The Churching of America, 1776-1990

When we received Christ, Phil added, all of a sudden we now had a rule book to go by, and when we had problems the preacher was right there to give us the answers.James M. Ault, Jr., Spirit and Flesh

As far as the Catholic Church is concerned, the principal focus of her interventions in the public arena is the protection and promotion of the dignity of the person, and she is thereby consciously drawing particular attention to principles which are not negotiable...
[1.] protection of life in all its stages, from the first moment of conception until natural death; [2.] recognition and promotion of the natural structure of the family... [3.] the protection of the right of parents to educate their children.Pope Benedict XVI, Speech to European Peoples Party, 2006

At first, we thought [the power of the West] was because you had more powerful guns than we had. Then we thought it was because you had the best political system. Next we focused on your economic system. But in the past twenty years, we have realized that the heart of your culture is your religion: Christianity.
David Aikman, Jesus in Beijing

But the only religions that have survived are those which support property and the family.
Thus the outlook for communism, which is both anti-property and anti-family, (and also anti-religion), is not promising.F.A. Hayek, The Fatal Conceit

Conservatism is the philosophy of society. Its ethic is fraternity and its characteristic is authority  the non-coercive social persuasion which operates in a family or a community. It says we should....Danny Kruger, On Fraternity

Families helped each other putting up homes and barns. Together, they built churches, schools, and common civic buildings. They collaborated to build roads and bridges. They took pride in being free persons, independent, and self-reliant; but the texture of their lives was cooperative and fraternal.Michael Novak, The Spirit of Democratic Capitalism